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Lion Brewery Ceylon: 4Q FY21 - At-home consumption to lead FY22E volumes

  • Revenues increase QoQ; we expect strong momentum in FY22E
  • Currency impact and commodity prices mitigated; GPM to be maintained
  • We maintain our TP of LKR 700/share and BUY rating

We maintain our target price of LKR 700/share and, incorporating a FY22E dividend of LKR 11.00/share, arrive at a total return of +29.3%. BUY. Excluding the impact of a one-off impairment charge, LION reported an EPS of LKR 12.22 for 4Q FY21, coming above our estimate of LKR 10.46 for the quarter. Revenues picked up heading into the traditionally strong Avurudu (New Year) season as consumer demand recovered under a more normalised operating environment. Looking into FY22E, we expect a rebound in economic activity and income levels to translate into strong volume growth for LION. We expect margins to be maintained at current levels supported by 1) less pricing volatility amidst more consistent tax policies and 2) a range of factors mitigating currency and commodity price risk. Our current valuation remains at a conservative P/E multiple of 15.5x FY22E earnings, making LION an attractive BUY.

Revenues increase QoQ; we expect strong momentum in FY22E

Revenues picked up significantly by 9.0% QoQ (+21.9% YoY) to LKR 14.8bn. LION note that this resulted from 1) removal of 2nd wave lockdowns, 2) traditional Avurudu (New Year) demand and 3) improved disposable income as economic activity resumed. Management notes that strong momentum continued in 1Q FY22E until the 3rd wave lockdowns and restrictions on alcohol sales were imposed. Notwithstanding this near-term impact, we expect a rebound in economic activity and income levels during CY22E to support LION’s volumes. We note that LION’s revenues have remained at their highest levels for three successive quarters, providing strong support to our thesis. This comes despite a slowdown in tourism and shifts in volumes from premium channels such as hotels and pubs towards “at-home” consumption.

Currency impact and commodity prices mitigated; GPM to be maintained

LION’s gross margins improved 2.3pp QoQ (+3.3pp YoY) to 21.6% in 4Q FY21. Excise duties, which account for approx. 70.0% of total COGS, have remained unchanged as mentioned above. LION is exposed to currency depreciation and rising commodity prices on its raw material imports; however a range of factors help negate this impact. These include 1) LION’s partnership with Carlsberg to source raw materials at favourable prices, 2) revenue generated from exports (approx. 8.0% of total revenue) which can hedge against the currency impact and 3) the ability to pass on cost increases along with excise duty increases. Management has stated that such cost increases are passed on when price increases are made following routine excise duty changes. Looking ahead, we expect GPM to be maintained at approx. 21.0% in FY22E.

We maintain our TP of LKR 700/share and BUY rating

The stock is down 6.0% YTD and up 10.4% YoY. It is currently trading at a P/E multiple of 12.2x FY22E earnings which corresponds to the lowest range of its P/E band. We believe LION should rerate upwards on the back of 1) a recovery in earnings coupled with 2) LION trading at the lowest band in the P/E chart.  We value LION at a conservative P/E multiple of 15.5x FY22E earnings and maintain our target price of LKR 700/share. Including a dividend of LKR 11.00/share, we arrive at a total return of +29.3%. BUY. Key risks: 1) prolonged impact from current lockdowns, 2) ad hoc tax increases and 3) sharp commodity price increases and currency depreciation.


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